Chris Davis Picks Stocks, Praises Buffett, Rips Politicians

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This is Greg Bartlett for Barron's The Way Forward. Now, in planning for today's podcast, which is being recorded on May 26th, I wanted to discuss what's top of mind for most investors, and not surprisingly, that's the stock market. And I also wanted to interview someone who has a long track record of success and who intimately understands value stocks, given that after a decade of underperformance, they've finally woken up. Well, all roads led to Chris Davis, chairman and portfolio manager of Davis Advisors. And today, Chris will discuss where he sees opportunity in the market, value versus growth, the Fed, inflation, and interest rates. And he'll also describe what it's like working alongside Warren Buffett and explain what prompted his firm to launch active ETFs. Chris, welcome.

Oh, thank you so much, Craig. It's great to be here.

Well, look, we have a lot to tackle today. We're going to try to get it in not too long a time, but first, for listeners who don't know who you are, tell us a tiny bit about yourself, and then let's try to unpack what's going on in the markets today.

Well, I've been managing money on behalf of clients for about 30 years. We were old-fashioned, research-driven, long-term equity specialists, and I think one of the things that separates us is just a profound alignment of interests. We are the largest investor in the funds that we manage for clients, and so we make a lot more money from better results than more assets under management. We try to look beyond predicting stock performance and focus on owning businesses for the long term so that our returns can be driven by the returns of the underlying business as if we owned the entire thing rather than as if we're trying to predict a future PE strategy or a change in psychology to generate our return.

And there's again, a lot to unpack with the markets. I mean, the market's, you know, risk on, risk off, it's all over the place. What's your take on where we are today? And just starting with a little context, the NASDAQ's down, I think, 25%+ year-to-date. S&P was down 17%, 18%, 19%. Large-cap value about 5%. So definitely there's been a repricing of risk. But again, what's your take on things now?

Well, if I think of our overarching goal is to build generational wealth. And so we really trace our roots back to my grandfather who started investing in the late 1940s. And you think about that, and that meant really he had come through the crash and the Depression and World War II, and then right into the Cold War, the Berlin Wall, the Cold War, Korea, Vietnam, presidential assassinations, the creation of OPEC, the crash of the early '70s and stagflation. Right through to Watergate and political scandals. And, you know, the Soviet Union invaded in that time Czechoslovakia, Hungary, and Afghanistan twice. So when you have that mindset of thinking about investing not over a 5-year, 3-year, 10-year stretch, but sort of generational wealth building, what you realize is that the game of trying to make predictions is a fool's errand. I mean, what people wanna know today, Greg, is they wanna know, you know, it's all macroeconomic, right? They want macroeconomic forecasts. That's the big focus of today. They wanna know, are we in a real bear market? How is it gonna play out? What about the prospects of stagflation or recession? Of course, there's interest in geopolitics. Now, the same people that will line up to give predictions about those topics are the same people, Greg, that failed to predict the Russian invasion of Ukraine. They failed to predict COVID. They failed to predict the sharpest market decline in history and the biggest rebound in market history. So you have people that failed to predict what's already happened, and yet we rely on them to give predictions about what's going to happen next. So When we think about investing through the cycle, what we know is when we make an investment in a company, we believe, we model that we will own that company in a recession because there is going to be a recession. We just don't know when. There is going to be a period of rising rates, falling rates, inflation, strengthening dollar, weakening dollar. So I will give you my opinion on those subjects to the extent that you want them. I just want to make clear that we invest, when we build our return models for each business that we own, we do it with the expectation that we will own that business through periods of weakness and periods of strength. And that's sort of that generational investing, wealth-building mindset.

Your words ring true, and they're also quite reassuring and hard to dispute. It's interesting because so many people, the media, et cetera, They very much don't play into that because it's reassuring and probably hard to commercialize that message, too, quite frankly. You're widening the lens very much. It's kind of like what Buffett said, "Don't bet against the U.S. economy." You're going to have GDP. It should grow as long as, absent some global calamity on a seismic scale, you can infer that there will be growth and ergo profits. You'll probably do fine as long as you have a discipline and don't dart in and out of the market.

Well, and like my wife used to say, you know, the secret to a happy marriage is low expectations. And I think one of the issues is that when people invest, I think one of the most valuable things advisors can do is recognize that setting expectations matters for a healthy relationship. It does not make it easier to get the client upfront, but it doesn't matter because it makes it easier to keep the client. It makes for a happy relationship. So if you were to set expectations you get a client, what you'd say is, hey, there's a 10% correction on average every year. There's a 20% bear market on average every 3 years. You know, the average drawdown from high to low in any single year is 14%. You know, 54% of years have double-digit drawdowns, right? In other words, there's nothing unusual about the market being down 20%. It is a unpleasant but regular feature of the investment landscape. And by setting those expectations, you in a sense mentally help the client be prepared. Now, when instead the client turns on the news and sees, oh my God, the market's down 10%, it's down 15%, it's down 20%, well, everybody is screaming that this is Armageddon, not that, well, this just happens every 3 years. And Greg, you Got the reason why. It's because, you know, I'm gonna pick on the financial media, uh, but the financial media— let's use the Weather Channel as an analogy. The Weather Channel is not in the business of predicting the weather, right? They're in the business of selling ads. Now, to sell ads, they need excitement, they need viewers, they need engagement, to use a word du jour. And to get that, you can't say Well, on average, the weather is pretty normal. You have to say we're in a heat dome or snowpocalypse, or, you know, the pollen count is, you know, at radioactive levels. You need to create a storm of the century, you know, a couple of times a year. And so you need to generate excitement. And you need to do that in order to sell ads. So the Weather Channel, of course sensationalizes the weather rather than predicts the weather. And the financial press is prone to the same thing because they're not in the business of predicting markets. They're not in the business of managing investor behavior. They're in the business of creating engaged, excited viewers and a lot of drama. So that's right.

And I love the weather example because— so I'm going to argue that that's true for all media. But weather, you would not even think of that. Most people see it as relatively, you know, saccharine low as to whether it's windy or sunny. But you're right, they need conflict, they need tension. That drives engagement, which drives ratings, which drives revenue and profit. So it all comes together.

What a wonderful story on that, Greg. From, you know, my hero and mentor in life is Charlie Munger, and I was asking him about this because as a capitalist, I fundamentally believe that we have a system that's pretty good at weeding out things that don't work. So the fact that You know, to quote Galbraith, who said, you know, the fortune of economic forecasting is to make astrology look respectable. You know, I find it interesting that there's so many people make a living giving forecasts that have no predictive value about where the market will be a year from now or interest rates and so on. And the data, you can quantify that there is no predictive value in these forecasts, and yet everybody makes a living. So I was asking Charlie about it, and Charlie said, well, let me tell you a story. In my town where he has a lake house in Minnesota. And he said, you know, there's a tackle shop. And I was looking at a new lure there that was pink and green. And I said, my God, this is the weirdest looking thing. Do fish take this lure? And the old-timer behind the desk said, mister, I don't sell to fish. So I hope that fish take it. But I stock that lure because people take it. That's the business I'm in. I'm not in the fish catching business. I'm in the tackle selling business. They may be vaguely related and correlated, but they are not the same thing. So I think you're exactly right about— and you're right to extrapolate it to general media from this.

Well, you know, and to your— what's interesting, I mean, about political news, for example, is people will watch pundits. It really comes down to supply and demand. There's heavy demand for the pundits to write, to predict, and there's ample supply. But even when people watch and listen, They intellectually know that there's a good chance they'll be wrong, and yet they still are incredibly interested, perhaps to just get a morsel of wisdom. I don't know.

Well, Greg, I'm going to say something really even worse than that. To generate sensationalism about the weather, so a few more raincoats or umbrellas are sold, or sensationalism about the market so that there's a little more volatility in transaction volume, you don't have to be in the innermost circle of hell for engaging in that. Whereas when you think about what's happened in our political discourse, you really need to be in the inner circle of hell. It is because what's happened is by recognizing that negative advertising creates engagement, people respond in anger more strongly, in disgust, in fear more strongly. Well, I don't know if you remember back, you know, in the 1970s, If you looked at consumer products commercials on TV, there was lots of negative ads. Oh, you know, their burger is fried. Oh, theirs is frozen. Oh, their, you know, theirs has artificial ingredients. Ours— and you notice you see very few ads today for commercial consumer products that have— that are negative in the same way. And you know the reason? The reason was what they realized is although negative advertising is really good for shifting market share, it shrinks the category over time. So what happened was in the consumer products arena, people started wising up and saying, well, there was a natural governor because we could gain 5 points of market share by saying their product has artificial ingredients. And then they would take back 4 points of market share by saying ours was frozen. And then they would take that back by saying ours was fried. But in the meantime, the category started shrinking. People saw too many negative images of burgers and they decided they didn't like burgers quite as much. And in politics, there's no governor to that. So what we are doing by this continual barrage of negative advertising, they have decided to prioritize market share. In other words, getting elected over the disgust with the entire system that all of that negative advertising is generating. And that is an insidious, treacherous, traitorous form of behavior for our public servants to be engaged with. So I, I would say, and that, that is the one area where I think the, the destruction to our, our civil society that comes from having a system where it's okay for a politician to degrade the entire system, provided they get reelected, is a terrible and discouraging outcome.

I totally agree, and it's definitely cynical. And sadly, in the short term, a lot of the— if you think of the ecosystem that benefits from that, they're incentivized structurally to, to, to further that. I mean, for the person to come out and say, hey, stop, don't do that, the risk-reward is probably not going to be very good. So they just kind of go with the flow and It kind of helps all the people, I suppose, involved in that. But it is definitely discouraging, yeah, and highly unfortunate. Well, we've solved a lot of the big problems in the world.

We've at least described the big problems. I would say we haven't done any— we have had no solutions thus far.

No, none whatsoever. OK, so with the market, I understand how you're framing it. So let's talk less about things like bull market, bear market timing, because I understand your point about about a longer flow of time. I want to talk about two of your active ETFs and what I found quite interesting about them. There's the Davis Select Equity ETF, DUSA. It's large-cap. It has 50-55% financials and then it has a healthy amount of tech and communication. And then also Davis Select Financial ETF, DFNL. And per the name, best of breed or larger financial firms. Tell me a little about why you guys launched these, what the thinking is, and then I want to have a conversation about some of the underlying holdings because the composition is particularly interesting on the DUSA.

Well, it's a great question, right? We have an investment discipline that has been, in our view, proven over 50 years. And it has characteristics of low turnover, low expenses. Uh, uh, we have a culture of transparency, uh, and we tend to work and have built our firm in relationship with financial advisors. And the reason is we think managing a portfolio is different than managing a client, and managing behavior is different than, than doing financial analysis on businesses. So we've had that mindset for 50 years or more. And we had some advisors come to us a few years ago, 5, 6 years ago, and say, you know, given that you guys have low turnover and low expenses and a culture of transparency, could you offer your services in the form of an ETF? And at first, uh, like many people, I thought, oh, but aren't ETFs passive? And of course, what you realize is Well, passive is a strange word. There are lots of, quote, passive ETFs that have very high turnover because the constituents of an underlying index are changing so much, you know, growth, value, and so on. And of course, we realized for many advisors, an ETF structure was really helpful to their practice to serve their end client. There were, you know, tax concerns or ease of transactions. And, you know, the way the systems that they were involved in, in their firms where they happen to be. And so all of a sudden, a light bulb went on, and we thought, it is amazing to me that there aren't more actively managed ETFs. And so we launched, uh, uh, our ETFs of our, uh, uh, the strategies in which we saw the most promise in the current environment. So they weren't necessarily the most popular strategies in the current environment, but the ones where we saw the greatest investment potential, because of course we're going to put our own money into them. That's part of our promise to clients. And so you, you picked on two that are very close to my heart. Uh, one is very contrarian because it is, uh, we're launching at a period when active management is out of favor in general and value is particularly out of favor. We launched DUSA, which is a concentrated focused, uh, stock-by-stock sort of proven value discipline, uh, uh, actively managed U.S. fund. And so, you know, it was something that, uh, it was not necessarily in the spotlight and in favor, but where we see enormous opportunity. And it's, it's, you know, based on our long-term same investment discipline run by the same portfolio managers, looking for the greatest opportunity to find durable growing businesses at value prices in the US and own them for the long term. So that is DUSA. And as I say, that sort of approach has been out of favor for a long time, but we think it's worked over decades. And so we love offering that as a true ETF, not one of these hybrid models, but fully transparent. And we've been running that for some years. And then you're absolutely right, DFNL. And this one is close to my heart because, believe it or not, more than 30 years ago, I launched a financial mutual fund, an open-ended mutual fund that specialized in financial stocks called the Davis Financial Fund. And I've run that for 32 years. And over that time, that fund has beat the S&P 500 and really beat the financial index. And so When we looked in the ETF space, we were struck that the biggest ETFs that specialized in the financial sector were very concentrated in just a handful of mega-cap banks. And I happen to like those banks, but I mean, I'm doing this from memory, but I want to say they had, you know, about 40% of the fund invested in about 5 stocks. And our view is when people think they're buying an index, they aren't necessarily thinking about that degree of concentration. And so we've beaten the financial indexes handily over a long period of time in our open-ended mutual funds. So our view was we had a discipline, we had credibility to bring that into the ETF space as an actively managed financial sector fund. And that is, we're more diversified than the index. I think we have a little bit— we're a little safer as a result because we have a little more representation of some of the different subsectors— property casualty insurance, and investment banking, commercial banking, regional banking, and so on. But I will say, Greg, that, you know, financial stocks in general and bank stocks in particular remain one of the great opportunities in today's market. So if we love our diversified, general, actively managed equity approach, but if we take to heart Mae West's advice that too much of a good thing is wonderful, then certainly the financial sector is where we see terrific opportunities. In these markets. That was why we launched DFNL.

Excellent! In terms of the other fund, DUSA, you have financials. It looks like your top holding is Berkshire Hathaway, Capital One, Wells Fargo, U.S. Bancorp, etc. But what's really interesting is you have a number of mega-cap tech names, as well. Alphabet, parent of Google, Amazon, Meta Platforms, parent of Facebook. That's really interesting because quite often you wouldn't see those holdings in the top 10. But what's interesting because it speaks to independent thinking. I mean, it's not the usual suspect. You also have relatively high-conviction bets there. Tell me about how you're being independent by going in different directions, but thematically limiting it, too, and not spreading yourself too thin, either.

[Speaker:GARDNER] Well, absolutely. I'll make two observations that will sound a little contradictory, but you'll actually see how they come together. The first is that we have been in a period of time where if you simply divided the market market into growth and value. Uh, an enormous dispersion was created there over the last decade, uh, and it really blew out in the last year. So we think that that gulf, which reminded us a lot of what we saw in the late '90s, was just way too wide. So there was a great opportunity in the late '90s to begin to build up the value side of your portfolio. And of course, what had happened, uh, was that even though growth had so dramatically outperformed for, I want to say, a decade. When you went through the next 5 years into 2000, 2005, what happened was, you know, value did okay, nothing to write home about. You know, it was, call it roughly flattish, up 2, 3, 4%, but growth was down 30%. And I think that's one of the things we're highlighting over the last few years is that people think about value lagging growth, but when value lags growth, you still are making money. And, but what happens when the cycle reverses, if you end up with growth so dramatically overvalued, it's not that you underperform on a relative basis, you do, but that's bad enough. But what really destroys returns and destroys clients over time is you end up with the idea of having negative, substantial negative returns for, you know, 4, 5, 6, 7 years. And that's That's what happened between 2000 and 2005. So the first part of my answer is, of course, this growth got so far ahead of itself in aggregate. And so that moves us over to the value side. But then what you said in your question that's so astute is we would say the real opportunity is to look beyond those labels. Because even if you think about that 2000 to 2005 period, You know, that it was out of those ashes Google came, right? Amazon erupted out of those. So you, if you said, well, all I'm going to do is avoid the growth correction and I'm going to dive into deep value, you missed what could build wealth over the next decade. So what we say is look beyond the labels, look for undervalued growth, right? So not the growth pretenders, not the speculative, not the Spotify, Shopify, Square, Zoom, Tesla, NVIDIA. I mean, the stuff that were like the absolute darlings at 20 times sales, for God's sakes. So avoid what we would call speculative growth. Focus on undervalued, durable growth. What do we mean? Well, we mean, you know, Intel, Google, Applied Materials, Texas Instruments, JD.com, even Amazon at today's prices. So durable. Then on the value side, If you're interested in value, be very careful to avoid cyclical deep value. And the reason is you may get it right. And if you do, you're going to do great. But boy, you get a recession and you're in a bunch of fragile levered companies that face disruption and disintermediation. Think of the sort of cigar butt cyclicals, high fixed costs. Those businesses, if you get them wrong, you're going to be wiped out. So what we say is, within the value sector, focus, uh, on durable growing value. So undervalued growth, growing value. What do we mean by that? Well, we mean not the value traps, not that deep cyclical value, but select financials, select healthcare, select industrials. So, you know, some of the financials you mentioned, we think of them as Durable, growing value. They've shown their resilience. My God, they went through the financial crisis. They went through COVID. They went through tech telecom. I mean, a lot of the financials today are safer than they've ever been and cheaper than they've ever been. So select financials, select healthcare. You know, within the healthcare space, there are hot biotech darlings and there are just durable companies at reasonable valuations with long-term growth. Think of Quest, Viatris, things like that.

Okay.

So, some insurance, some global companies, and some industrial companies like Darling, Berkshire, you mentioned. We think of those as high-quality industrials.

OK. And getting now more into the macro, given what's going on now with the market, obviously no one knows where the bottom is, etc., and it's not per se important that we nail it, but what would capitulation look like? And to the extent you could describe what we might see, because to the extent it matters, the VIX, I think, is under 30. There's obviously a lot of fear, but I don't know. Just tell me what's your take on all that.

Well, the only people that buy at bottoms are liars. Uh, you know, it is, uh, you know, capitulation will look like panic. Um, do I think we're in an environment of panic now? I don't think so. Um, you've gotten a bubble being burst And are we in panic? I don't know. What I do know is that the businesses that make up our portfolio are currently generating, on average, about a 7% or 8% earnings yield. Right? So that is a hell of a decent place to start. They're resilient, durable companies with long-term records of growth, and yet they're on average trading at 12, 13 times earnings. I think that's sort of roughly the aggregate for our portfolios. So our view is, you know, my grandfather, when I used to say, when's the best time to invest? You know, asking him about timing, he would say, when you have the money. You know, more trying to predict the bottom is hard. But what we know is we're not buying businesses at the top. All right. We're buying businesses that are at good relative valuations. They're at good absolute valuations. They have proven records of durability. So it doesn't seem to me like a bad time to get started. It doesn't feel like a panic. COVID felt like a panic. Of course, the financial crisis was a panic. You know, '99 and 2000 was a reorientation of the market, right? The market was down 9%, but I want to say in that year we were up 9% or something like that. And a lot of value investors were. So I do think we could have an environment where the market could continue to correct, but you could get enormous differentiation. That has not happened yet. Yet, Greg. I think partly it's because there's still so much money sloshing around with index and algorithm, uh, that this thing could go on longer than we think. But we, we think the starting point today is not bad. And just having the discipline to move rationally, not try to wait for the bottom, uh, but try to be sort of disciplined about averaging in, uh, uh, it— this doesn't seem to be a bad place to start. And I would say not only in some of the companies that I mentioned, value strategies, but with a focus on durability. It's certainly, I don't think, too early to be running a Geiger counter over some of the collapsed hot darlings and looking for, you know, when Amazon got thrown out with the bathwater of the internet debacle of 2000, 2001, 2002. So we think you wanna be looking there. And if I was to add one more idea for you, Greg, about what looks lousy in the world, where people have not wanted to invest, I would continue to say people should be looking globally. The U.S. has so dramatically outperformed the rest of the world in terms of stock prices, but not always by businesses. There are some absolute stunningly good businesses in Europe, in Asia, in China, in Hong Kong, in Singapore. And we think that investors should be open-minded to looking when they can buy a business of comparable quality at half the valuation. Don't be afraid to look overseas.

Can you be more specific? Any sectors or countries, just to be a little more granular?

Well, Greg, you know, not to be a broken record, of course I love durable financials around the world. So think of the Development Bank of Singapore, DBS. Think of Danske Bank or Bank Julius Baer in Europe. You know, these are, you know, Julius Baer is a private bank and a wealth manager. You know, I think it's got a 5% dividend. Trading at, you know, 8 or 9 times earnings with high capital ratios and, you know, 100 years of operating history. Danske Bank in Denmark or DNB, the largest bank in Norway. So financials is one. And then I would say I am a— I believe that there is so much fear and panic priced into the best Chinese companies that I think it's worth putting a marker on the table. I wouldn't want to bet the ranch. There is political risk. There's uncertainty. But China has outgrown the U.S. for more than 40 years. They've been rational, pro-business, and long-term. People are afraid. And as I say, I think it's good to be thoughtful about it, not religious about it. But companies like Tencent, Alibaba, JD, those are some of the best companies we know anywhere in the world. They are domestically serving the growing Chinese middle class. And so we think that the opportunity to own those businesses at, you know, in some cases single-digit multiples seems to us we're getting paid for a lot of risk. You know, John Templeton used to say, people always ask me what looks good, but if they're interested in investment opportunity, they should ask what looks bad. Where are people scared? And I would say in terms of panic, I said I don't see panic in the U.S. yet. I haven't seen any panic in fixed income, which surprises me because in some cases people have lost more money in bonds than they have in stocks, and yet nobody seems to think of bonds as risky yet. That was very different. My grandfather called bond certificates of confiscation, and I think you could lose money for a generation in bonds starting at the prices where we were a year ago and continuing. So I think there's risk there, but where I do see panic in the world right now is definitely, you know, I see distaste internationally and panic in China. And so again, running the Geiger counter over the panic and looking for the businesses that have characteristics of durability, as I said, the Amazon in 2002, you know, when it was down from 80 to 6, well, it looked a lot riskier, but boy, it was a career maker for people that were able to, to move against the grain during that panic. And that's why we like having a portfolio that allows for undervalued growth as well as durable growing value.

Yeah, Amazon wasn't the only one. I think in its history, Apple has fallen by more than 90% once or twice going back in its history. And Amazon may have fallen by more than 90% even more than once, too.

I'm embarrassed to say we owned Apple briefly at a time when the market cap was less than the mark-to-market value of their real estate.

Wow, that's amazing. Well, I just want to mention—

I made a quick double and sold it.

Well, at the time you must have felt great, but yeah.

Oh yeah, I don't feel so smart in retrospect.

Well, we'll edit that part out of this interview. Just kidding, no. But one point on the Chinese stocks, Alibaba actually is up 15% today. So that, I mean, there is so much pessimism that probably wouldn't take much to set some of these going higher?

It won't take much. And as I say, there's been very little in Chinese policy over 40 or 50 years that has been radically anti-business. And so there are some exceptions, but there are exceptions in Europe too. And so far we think by and large that is, the history would indicate that's a rational government that is interested in economic growth. And so putting a marker on the table, I don't think that's a crazy idea in the same way it was like buying financial stocks here after the financial crisis. People almost thought you were unpatriotic if you were willing to buy Bank of America or Wells Fargo. I mean, after what the banks did to our country, you know, people were angry, clients were angry. And we get that reaction with, you know, even though we have a relatively small investment in China, you know, as percentage of total firm assets. Our view is, you know, you've got to be willing to look where the headlines are bad. You know, you think of Philip Morris in the '90s. I mean, my God, people couldn't stand it, and yet it was one of the best performing stocks for the next 20 years.

Yeah, a lot of it's due to that dividend and reinvesting that.

But yeah, some of these Chinese companies are now buying in stock for the first time in their histories. And so that's a very, very interesting change.

Well, I want to now pivot to Warren Buffett, and he comes up in my mind now for two reasons. One is being on the board of Berkshire and also Coca-Cola. But I did want to say, a lot of the stocks that you're describing and what you like, it makes me think of a Warren Buffett quote that I'm going to butcher here, but try to paraphrase. He said, in effect, "It's better to buy a great business at a high valuation than to buy an average or mediocre business that's cheap." And that's kind of what I'm hearing from you. Get the moat. Get the quality. Get the reliability and consistency. Obviously, you don't want to overpay. If you find that quality, buy it, own it, and stick with it.

You're absolutely right. I mean, the best is to buy a great business at a cheap price. And what's interesting is that our portfolios currently, the relative valuation discount is about as wide as it's been in my career. So I do think that we're getting that, what I call the value investor's dream, businesses that are growing at an above average rate and yet are trading at a below average valuation. That is a rare combination. And we have that in all our major ETFs and strategies today, where by being selective, on average, our earnings growth over the last 5 years for our companies has been higher than the indexes, and yet the PEs, the valuations, are lower. So we love that combination. But you're absolutely right, what, you know, the best is a, you know, a high-quality growing business at a very low price. But if given the choice between an average business a bad business at a low price or a great business at a fair price, you should choose the latter. And so we do think that, you know, when you take a 10-, 20-, 30-, 40-, 50-year view of owning a business, that growth— businesses that grow profitably are more valuable than businesses that don't. Growth is a component of value. So we love owning businesses that have grown over long periods of time. They just might not be always is considered sexy growth. You know, as I say, companies in financial services, you know, Capital One has been a wonderful growth company since it was started by the current CEO. I mean, it's amazing to think one of the largest banks in America is still run by the founder. I mean, Alexander Hamilton's not still running Bank of New York. Mr. Wells and Mr. Fargo, having first created American Express and then gone on and created Wells Fargo, I mean, talk about a power duo, you know, but they aren't still running those institutions. And yet Capital One is still run by its founder, and yet it's been a profound growth company, but it trades at, you know, a single-digit multiple.

Well, do you know offhand what year they were founded? Capital One?

Capital One, I want to say, is about 1989. I'd have to double-check that, but it was either the— I think it was the late '80s, very late '80s. And Rich Fairbanks came right out of Stanford Business School and had this idea. It's going to sound a little familiar to you, Greg, which is, hmm, I wonder if we can use technology and data science as a way to rewrite the rules of financial services. So he came in and said, it's interesting that everybody who has a credit card pays the same price. Why don't we target used data to selectively market special deals to individuals. And of course, they didn't have any branches, they didn't have any brand, and they built— they and 2 or 3 other companies that started around the same time specializing— disrupted the entire credit card industry, took about 30 or 40% of the entire industry from the incumbents. And so, you know, when people talk about fintech disrupting, I always think, well, Well, you know, Rich Fairbanks and Capital One were a disruptive force, and yet they've ended up as a very valuable bank.

Right. I mean, a lot of banks or financial institutions can essentially acquire it as well. They can integrate it. They can co-opt it sometimes.

So it's—

I think the narratives often are very David versus Goliath, and it's not so black and white often.

No, banks have been very good at incorporating innovation over time. I mean, from money market— the invention of the money market fund to the invention Venmo. You know, the banks were, you know, caught on their heels, but they reacted, and all of a sudden Zelle is bigger than Venmo, and, you know, money market funds are just an essential part of the banking system rather than a disruptor to the banking system.

Mm-hmm. Okay, and I just want to touch on Warren Buffett, your long history with him. You were asked to join Berkshire's board last year. You're a member of Coca-Cola's board. Just tell me a little what Warren's like, just speak to your relationship, etc.

Warren and Charlie and Berkshire Hathaway, in addition to, of course, demonstrably being one of the greatest investment and then business leaders of the last century, they're also exemplars. And I think that that it really matters in a world where there is increasing skepticism about business, about capitalism, about corporate America, you know, to point out and study Berkshire as exemplars of the right aspects of capitalism. You know, the old saying of the Quakers that You know, they came to America to do good and they did well. Uh, well, Berkshire is a wonderful example of a company that has done both. It is the model for stewardship. Uh, it is the model for, for absolute, uh, uh, uh, stewardship of shareholders' equity, of communication, of integrity, of resiliency, of adaptability. And, uh, and of decency. Uh, and I think that it's very valuable for companies like that to be celebrated. And, and I think anybody that is in the world of business or investing or even simply curious about how our system works, one of the greatest aspects of Berkshire is that they've been such passionate teachers of their approach. They've been advocates for an approach of doing business with this degree of integrity and transparency. And once year, Warren has written a letter that is more valuable than any MBA anybody could ever get, would simply be to study those annual reports over the last 50 years. And so I'm proud of the association. I, you know, I would say, you know, it's— I've been a fan as long as I can remember, and we've been attending the Berkshire Hathaway meetings for, you know, 30, more than 30 years. For years, and I've been studying and admiring the approach and the culture of stewardship, which is something, and alignment, which are aspects that we try to embody in our own practice with our own relationship with advisors and clients.

Well, you know, it's interesting, Chris, is I saw you at the Barron's Hall of Fame interviewed, and when the topic of Berkshire, Warren, and Charlie came up, your thoughts, your feelings were palpable, just as they are now. The words are a little bit different, but they're almost the same, and the conviction is the same. I have written down here, you said you spoke to Berkshire as being an exemplar of stewardship. You said that being on Berkshire's board feels like an honor. I also thought the following was most interesting. You said the company is worth fighting for. On the surface, your average person might say, "What is this epic?" Why would a specific giant company need anyone to help defend them? But to your point, there is so much chicanery, malfeasance, deception, etc. Cynicism in business, and this company often is trying to lead and do the right thing.

Yeah, it's the sort of place that consultants and investment bankers hate. And of course academics sometimes hate it too, because it's not supposed to work so well. And so, you know, it's interesting, the public disclosure around the investment banking fees and the structure on the Allegheny purchase. There are ways that, you know, Berkshire tries to educate both the public, the press, their shareholders when they see excess in the system. And of course, the people that are profiting benefiting from that excess, don't really like to have a spotlight shone on them. And so, but Warren is a giant, and he fights for what he believes is right, and certainly he fights for that sort of decency and common sense. And it makes sense, you know, it's the old saying, you know, you'll know a genius when the dunces form a confederacy against him. Berkshire Hathaway has no right-minded enemies, but it certainly has done a lot to hold a light up to the dark underbelly of parts of the investment industry, the consultant industry, compensation consultants, and so on. So, you know, of course, lately some in the crypto world. And so there are There are enemies out there, and Berkshire is worth fighting for. It is an example that should last for 100 years from now.

Excellent! Well, we're just about out of time. Before we wrap up, I do want to ask you to share with listeners an actionable idea.

Well, I would say that when advisors are dealing with clients in an environment like this, I used to sit on some pretty fancy investment committees for some charities, mostly here in New York. And I, I made myself very unpopular on those investment committees because I did things like, whenever they fired a money manager, uh, I would keep track of how that manager did in the next 5 years compared to the manager that was hired to take their place. And of course, what always happens is people hire high buy and fire low. And so you get a whipsaw effect. And similarly, I think clients usually want to do now what they wish they had done 5 years ago, and it's very hard for an advisor to change that behavior, uh, using a sledgehammer. But what I found on those investment committees is if I could just slow the decision down and spread it out, average it out over time— if somebody wanted to get into whatever had been super hot for the last 5 I would say, "All right, well, we're going to hire this manager or allocate assets to that hot area, but let's do it 5% a quarter over the next 5 years." Slow the decision down, spread it out. And that sort of dollar-cost averaging, systematic investing, people think of that as a retail strategy, but it works very well with sophisticated clients and sophisticated institutions and almost always improves the long-term return. So systematic investing would be my one. Actionable idea.

And presumably in a volatile environment especially well, right? I mean, or at least it takes— it adds— imposes the discipline upon the investor.

Yeah, the only time systematic investing produces a relatively lagging return compared to just jumping all in is if the market is on a one-way upward trajectory. Usually that's not what advisors are worried about. They're worried about getting in a client and then having the market drop 20%. So spreading out that decision is a way to to capitalize on volatility. So to make a bigger return in more volatile markets while at the same time reducing the cost of self-destructive client behavior. So it's really a twofer in a volatile world. And I have to say, you know, to quote the old J.P. Morgan, if you were to ask me my prediction for markets from here, I would say they will fluctuate.

All right. Well, that's true as always and good to know. Well, you know, thank you so much. We covered a lot of ground, but I would have been happy to keep talking, and maybe we'll do it another time. It was definitely an enjoyable conversation.

Well, Greg, I was proud to be here. Thank you so much for having me.

Well, my guest was Chris Davis. For more advisor-specific podcasts, please check out Barrons.com/podcast. For The Way Forward, I'm Greg Bartolis.

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